Warren Buffett’s diversified conglomerate is still outperforming the market.
Berkshire Hathaway (BRK.A 1.32%) (BRK.B 1.16%) is often considered a reliable stock for conservative long-term investors. The conglomerate is led by Warren Buffett, who famously said his favorite holding period for a stock is “forever.”
It owns a wide range of evergreen insurance, railroad, utility, and consumer-staples companies; and it holds millions of shares in dozens of blue chip stocks in its closely watched investment portfolio.
Over the past five years, Berkshire Hathaway’s stock has rallied more than 120% as the S&P 500 advanced 100%. Let’s see why Buffett’s company outperformed the market — and if it’s the right time to buy, sell, or hold the stock.
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Understanding Berkshire Hathaway’s business
Warren Buffett’s investment fund took over the struggling textile maker Berkshire Hathaway in 1965. Buffett subsequently transformed Berkshire by liquidating its textile operations, rebuilding its core business by acquiring several insurance and energy companies, and expanding its reach into other industries. It now directly owns well-known brands like GEICO, the BNSF Railway, Dairy Queen, Fruit of the Loom, Duracell, Acme Brick, and See’s Candies.
Berkshire put a lot of the cash generated by those evergreen subsidiaries into its investment portfolio, which is now worth nearly $314 billion and holds massive stakes in companies like Apple, American Express, Bank of America, and Coca-Cola.
Berkshire reports its profitability through its “operating earnings” — an adjusted metric that excludes the capital gains and losses from its investment portfolio — instead of its earnings per share (EPS) under generally accepted accounting principles (GAAP). It claims that this proprietary metric filters out the stock market’s near-term volatility.
From 2018 to 2023, its operating earnings had a steady compound annual growth rate (CAGR) of 7%, from $24.8 billion to $37.4 billion, even as the market was rattled by the pandemic, inflation, rising interest rates, and geopolitical conflicts. Last year, its operating earnings jumped 21% as the growth of its insurance underwriting and investment businesses easily offset the macro pressures for its other businesses.
The reasons to buy or hold Berkshire stock
The bulls still love Berkshire because it’s built on a foundation of evergreen businesses, it’s well diversified, and its investments are still directly overseen by Buffett. And while past performance shouldn’t be considered a reliable indicator of future gains, the stock has consistently outperformed the S&P 500 over the past six decades.
The company has also been pruning its portfolio and raising a lot more cash as lower rates drove the S&P 500 toward its record highs. It reduced its stake in Apple, Bank of America, and other top holdings over the past year, and its total cash, cash equivalents, and short-term T-bill investments hit a record high of $271.5 billion in the second quarter of 2024. The growth of that war chest suggests that Berkshire is gearing up to make some big investments if the market pulls back.
With a market cap of $982 billion, Berkshire trades at just 3.6 times its cash and cash equivalents, as well as 3.1 times the total value of its investment portfolio. Those reasonable valuations could limit its downside even if the market slips.
The reasons to sell Berkshire stock
The bears believe Berkshire will face choppier waters over the next few years after Warren Buffett steps down. The 94-year-old Buffett already plans to hand the reins over to Greg Abel, the chairman and CEO of Berkshire Energy, in the near future. Abel has big shoes to fill, and it’s unclear if he can continue to expand Berskhire’s core businesses while executing smart trades for its investment portfolio. If Abel “di-worsifies” Berkshire’s business, its growth could stall out.
Berkshire’s core insurance businesses could also be adversely affected by declining interest rates, which tend to reduce the profitability of their fixed-income investments. That might be why Ajit Jain, who has been Berkshire’s insurance chief for nearly four decades, sold more than half of his shares earlier this year.
The stock also isn’t cheap relative to its trailing operating earnings. At its current market cap, it trades at 26 times last year’s operating earnings. But five years ago, it was trading at about 21 times its trailing operating earnings for 2018.
Is it the right time to buy, hold, or sell Berkshire’s stock?
Those concerns are valid, but I think investors should still buy and hold Berkshire’s stock for three simple reasons: It’s well diversified, it has plenty of cash for fresh investments and acquisitions, and Greg Abel will likely follow Buffett’s playbook to a T instead of making radical changes.
Its stock could certainly pull back over the next few quarters, but investors who sell it today will probably miss out on some much bigger gains over the next few years.
American Express is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool has a disclosure policy.
